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Exchange Rate Choices of Microstates

  • Patrick A. Imam

In this paper we first explain why most microstates (countries with less than 2 million inhabitants) have gained independence only in the last 30 years. Despite the higher costs and risks microstates face, their ability to better accommodate local preferences combined with a more integrated world economy probably explains why the benefits of independence have risen. We explain why microstates at independence have chosen either dollarization, currency board arrangements, or fixed exchange rates rather than more flexible forms of exchange rate systems. We then, using the Geweke-Hajvassiliou-Keane multivariate normal simulator, model empirically the determinants of each of the different fixed exchange rate regimes in microstates and analyze the policy implications.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/12.

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Length: 48
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/12
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  1. Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
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  3. Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
  4. James R. Hines, Jr. & Lawrence H. Summers, 2009. "How Globalization Affects Tax Design," NBER Working Papers 14664, National Bureau of Economic Research, Inc.
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  9. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization: The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  10. Patrick A. Imam, 2009. "Introducing the Euro as Legal Tender—Benefits and Costs of Eurorization for Cape Verde," IMF Working Papers 09/146, International Monetary Fund.
  11. Ruggie, John Gerard, 1993. "Territoriality and beyond: problematizing modernity in international relations," International Organization, Cambridge University Press, vol. 47(01), pages 139-174, December.
  12. Frederic S. Mishkin, 2000. "International Experiences with Different Monetary Policy Regimes," NBER Working Papers 7044, National Bureau of Economic Research, Inc.
  13. Gaetano Antinolfi & Todd Keister, 2001. "Dollarization as a monetary arrangement for emerging market economies," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 29-40.
  14. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  15. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
  16. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  17. Armstrong, H. & De Kervenoael, R. J. & Li, X. & Read, R., 1998. "A comparison of the economic performance of different micro-states, and between micro-states and larger countries," World Development, Elsevier, vol. 26(4), pages 639-656, April.
  18. Schwartz, Anna J., 1993. "Currency boards: their past, present, and possible future role," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 147-187, December.
  19. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  20. Patrick A. Imam, 2008. "Rapid Current Account Adjustments: Are Microstates Different?," IMF Working Papers 08/233, International Monetary Fund.
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